Import duties continue to be significant elements in the cost of international trade. Yet many companies and businesses still pay more duties than the law requires – which impacts adversely on landed cost and ultimately on business profitability. A planned approach to managing customs duty costs would look to eliminate, reduce and delay payment of customs duties.

How to reduce customs duties in your business

There are many ways to reduce customs duties. The amount of duties paid depends on four “whats”. Managing the impact of any of these “whats”, will improve business profit.

1 What the goods are, (i.e. their nature and characteristics) determines tariff code and therefore the duty rate

2 What the origin of the goods is, (i.e. where dug up, grown, farmed, further manufactured or processed NOT just shipped from) determines whether preferential, standard or additional duties are payable

3 What the structure of the transaction is (i.e. whether sale, leased, loaned, free of charge, under warranty or repair arrangement), determines customs value

4 What happens to the goods once imported (i.e. sold, further manufactured, repaired and returned, stored and re-exported) determines whether various reliefs are available.

How to use a key opportunity in customs valuation planning

A major under utilised approach to reducing duties is to look at the customs valuation. A key provision in both US and EU customs law permits the customs value to be based on any earlier sale of the same goods in a chain of transactions prior to importation. For this reason it is variously described as the “prior sale”, “earlier sale” or “chain of sales” opportunity. They all mean the same thing, i.e. lower duty!

How does this work? For example, if goods are sold by a manufacturer in the US for $60 to a US export company which, in turn, sells them to an importer in the EU for $100, duty can be paid on a value of $60, providing certain conditions are met. The savings achieved are the difference between duty on the £100 and the duty on $60. Savings of up to 40% on the duty costs are possible.

What are the benefits? The chief benefit of the approach is to save customs duty by excluding the costs and profits attributable to the non-manufacturing activities undertaken in the country of export from the customs value declared at import in the destination country (US or EU).

The approach also uncouples the value of the imported goods for customs valuation purposes from their inventory value for corporate income tax purposes. That’s good because tax and customs values are often in tension. Tax authorities tend to favour a low import value (i.e. more profit to tax), whereas customs favour a higher import value (more import duty to collect.) Using an earlier sale approach, the price paid by the importer is no longer relevant for customs purposes, so that any increase in that price will not cause an increase in the amount of customs duty.

Who can benefit? Any company or business importing goods into the EU or US can benefit from the opportunity providing there has been an earlier sale and the exporter is willing to provide the relevant invoice relating to the earlier sale. Since this involves disclosure of margins by the exporter, the approach is more attractive to international groups of companies where such disclosure is not an issue and to industries where margins are already widely known. However, exporters can still realise the benefits by importing goods into the US and EU on their own account.